ETFs versus Mutual Funds. Which one to opt for?
5paisa Research Team
Last Updated: 10th December 2022 - 05:29 pm
One of the most common questions asked by investors is whether they should invest in Mutual Funds or in Exchange Traded Funds? Read on to find out more.
We often receive a lot of queries pertaining to passive investing and one such is whether to invest in exchange traded funds (ETF) or mutual funds? Both are structured in a way to provide investors with exposure to a bouquet of securities. However, the important differences between them are in terms of transparency, costs and investing.
Speaking about transparency, the holdings of ETFs are published daily, so as an investor, you know exactly what you are holding. Mutual fund holdings are published monthly which is lagging by nature. By the time the holdings are published, what the mutual fund actually holds might differ.
The cost of holding an ETF is much lower than that of mutual funds. To give you an example, the expense ratio of the index fund with regular plan is close to 1%, while for ETFs it is not more than 0.3%. The expense ratio of the index funds is lower among equity funds. Therefore, expense ratio of other equity funds is on the higher end.
The final key difference between the two products is investing. While investing in a mutual fund, there is a concept of cut-off timing. Hence, if you invest in mutual funds before 3:00 PM, then same day NAV is received or else next day NAV is applicable. However, in case of ETFs you can invest anytime during the market hours. This gives you the flexibility to invest depending on your analysis of the markets for the day.
Below are the key differences between mutual funds and ETFs.
|
Particulars |
Mutual Funds |
ETFs |
|
Investing |
Via Mutual Fund company or distributor, end of the day or next day NAV depending upon cut-off timing |
On exchange via stock broker |
|
Demat Account |
Does not require demat account |
Demat account is mandatory |
|
Transparency of holdings |
Holdings published monthly |
Holdings published daily |
|
Minimum Investment |
Minimum investment might be higher than ETFs |
Minimum investment is 1 ETF |
|
Expense ratio |
Higher compared to ETFs |
Lower compared to mutual funds |
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